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The Green Investor Update – November 19, 2011

On November 19, 2011, in Alternative Energy Stocks, Green Stocks, Market Trends, Resources, TGI Updates, The Green Portfolio, Wind, by Andreas Schreyer
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Offshore wind farm

In this update:

  • I.E.A. Issues Dire Warning
  • Rally Takes a Break
  • The Green Portfolio update and recommendations
  • Heaven for Value Investors

I.E.A. Issues Dire Warning
In its just released annual World Energy Outlook, the International Energy Agency which represents the energy interests of its member nations, the 28 largest economies in the world, warned that if the world continues building greenhouse-gas-emitting factories and vehicles at the current pace for just the next five years, it “will lead to irreversible and potentially catastrophic climate change.” The somber pronouncement takes a strong meaning when coming from the organization which has long been an advocate of the status quo and a mouthpiece for the fossil fuel industry.

The organization, as expected, keeps the most conservative and most damaging “New Policies Scenario” as the central one, in which “world primary demand for energy increases by one-third between 2010 and 2035 and energy-related CO2 emissions increase by 20%, with a long-term rise in the average global temperature in excess of 3.5°C.” Which happens to be the “irreversible and potentially catastrophic climate change” they warn about…

Still, the report marks some landmark policy shifts and acknowledgements, such as the admission that rising demand could clash with falling productivity at existing conventional wells and that the falloff in existing fields will be five times greater than the increase in flow from unconventional sources, per Fatih Birol, the chief economist at the I.E.A. For the first time, the I.E.A. suggests that eliminating fossil-fuel subsidies (which amounted to $409 billion in 2010 versus $66 billion for renewables) could bring important economic and environmental benefits.

Even the most pessimistic scenario shows the fossil fuel share of the global energy mix decreasing from 81% in 2010 to 75% in 2035, not nearly enough but a tremendous boost for renewable energy technologies which account for over half of new generation capacity installed and are set to grow faster than any other energy source, in relative terms.

Rally Takes a Break
As European debt worries shifted from Greece to much larger Italy, investors began to worry about contagion risks. The strong October stock market rally could not continue unabated for very long, and it didn’t. After appearing to consolidate for a couple of weeks, major market indexes like the S&P 500 and the Nasdaq Composite have now broken below their key moving averages, unlike the Dow Industrials and Transportation indexes which still cling to them.

Unlike any other asset class or commodity, and with no apparent reason, the price of crude oil shot up 18% in the month, closing above $100 per barrel for the first time since May. Experts point to increased fears and expectations about continued oil supplies as the primary factor driving up the risk premium. The on-going pull between steadily rising worldwide demand and ever tightening supplies and escalating costs will continue to exert upward pressure on energy prices for the long-term.

The Green Portfolio update and recommendations
Despite all the volatility of the last month, the S&P 500 index managed to advance 2.33%, The Green Portfolio gained 3.36% but the benchmark S&P Global Clean Energy Index lost 3.39%. This on-going discrepancy between the performance of the industry index and The Green Portfolio highlights the importance of careful stock picking as well as tight management of sector and company diversification.

Looking at the trends in various clean energy sectors, we witness continued weakness in solar, Chinese solar stocks in particular, and the low profile resurgence of wind energy stocks. The wind sector has deserved particular mention in every monthly update since July. While some segments of the market melted, the wind energy stocks in our portfolio established a solid base. As a group, our wind stocks gained 14.70% in the last month and they have the largest average gains of any stock groups we hold (49.86%.)

The strongest of the wind stocks in the portfolio is once again Woodward, Inc. (WWD) with a gain of 28.19% in the month since our last update, 103.37% since we initially recommended it some two years ago. The Fort Collins, Colorado-based maker of energy control and optimization solutions for the aerospace and energy markets announced stellar results beating earnings and revenue expectations, and offered a solid 2012 revenue outlook. The stock price broke out to levels not seen since 2008 and is now poised to test the all-time highs above $47.

For good balance we need to mention the weakest sector in the portfolio: Water, which landed in this unenviable position because the only sector holding happens to be the portfolio’s worst performing stock this month: Veolia Environnement S.A. (VE), which dropped 21.07% during the month. This is our only European stock and it got hammered by the worsening debt crisis, although nearly two-thirds of its euro revenue comes from the strongest countries, France and Germany.

With so many bad news and pessimistic views about the world in general and the stock market in particular, we find comfort (and profit opportunities) in uncovering jewels in the rough which time is sure to polish to a great shine.

Heaven for Value Investors
While the financial media focuses on the global economy, the risk of contagion from the European debt crisis and how bearish all of this is for the stock market, we find green investment opportunities with outstanding risk/reward tradeoffs. The doomsday scenarios may be right and a bear market could take stocks even lower. What we know is that demand for energy is not going down. Energy prices are trending up. By most measures, many of the renewable energy stocks we track, and in particular the ones we recommend in The Green Portfolio , have reached dramatically under-valued levels. With various clean and renewable energy sources at price parity with fossil fuels (wind), or fast approaching parity (solar), our stocks are screaming value plays, with or without government subsidies. Priced under book value, or even under cash-on-hand for some, these stocks have very limited downside risk. These are not Solyndras pushing product for half of what it costs to make. They actually have good margins, generate profits and some even pay dividends. What’s not to like?

** Stop guessing. Get immediate access to all Green Portfolio positions and recommendations with a no-risk 30-day trial. You’ll love our green stock picks! **

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The Green Investor Update – October 21, 2011

On October 21, 2011, in Alternative Energy Stocks, Green Stocks, Market Trends, Solar, TGI Updates, The Green Portfolio, by Andreas Schreyer
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In this update:

  • 7 Billion Strong
  • Solar Trade War
  • Breakout Attempt
  • The Green Portfolio update and recommendations

7 Billion Strong
Later this month humanity will reach another milestone when the global world population will reach 7 billion. It took only 12 years to add a billion! According to the widely respected Worldometers http://www.worldometers.info/world-population/ algorithm, which is based on the latest data and rate of change projections from the United Nations’ “World Population Prospects”, it will happen on October 31, 2011.

The other interesting statistic is that most of the population growth is occurring in emerging countries like China, India and Brazil which have seen strong economic development and rapidly growing middle classes. These are screaming demographics for energy consumption which has continued to rise (yet another counter available from Worldometers) despite the global economic downturn.

Population growth and increased energy consumption when combined with shrinking reserves and rising production costs of fossil fuels are fueling the megatrend for alternative energy.

Solar Trade War
When measured by the record numbers of megawatts being shipped the solar industry should be booming, but instead, industry overcapacity has caused panel prices to steadily decline to levels at which only the very best and the very subsidized can survive. Complaints have been growing from European and American manufacturers about various unfair trade practices by Chinese manufacturers, but this week the matter has been formally taken to the Department of Commerce and the International Trade Commission (ITC).

The complaint was filed by a coalition of seven U.S.-based solar manufacturers of which only SolarWorld is named. It is rumored that the companies are seeking anti-dumping tariffs on Chinese imports of up to 100%. While the ITC has 45 days to issue its preliminary determination, such cases typically take 15 months to resolve, but threats of retaliation will not take that long. In the meantime, the bloodbath continues in solar stocks as short sellers pile on.

Breakout Attempt
Markets are nervous, quick to turn on the latest news, good or bad. The most influential news has continued to come from Europe and the sovereign debt crisis. Volatility continues to be high but as the prospects of a solution to the Euro crisis are improving, so has the stock market. Since the new lows set early in October, most markets have rallied past the previous failed breakout attempts and started showing some bullish signs.

The optimists see the sharp rebound from recent lows back above support near 50-day moving averages as a promising development. Pessimists believe that this is just another bear market rally that most likely will fail to break through the overhead resistance presented by 200-day moving averages. The good news is that we won’t have to wait long to find out who is right, as the markets are bound to breakout from their increasingly narrow trading range, be it up or down.

The Green Portfolio update and recommendations
Since our last update, the stock market has plunged to new intermediate lows only to rebound sharply, with the S&P 500 index essentially flat for the month. The green sector point of reference, the S&P Global Clean Energy Index, lost over 15% for the second month in a row, but we find little joy from The Green Portfolio shedding “only” 5.48%.

Before moving to more pleasant topics we continue to marvel at the relentless solar selloff which took the six solar positions in the portfolio down an average of 23.59% for the month, with several of them vying to be the worst but failing to beat the 40.41% plunge of First Solar (FSLR) shares. These losses have little to do with the company itself, as it just announced a new efficiency record for thin-film modules in laboratory with changes to be phased into production over the next few quarters. The manufacturing technology advances should increase mass production conversion rates from an 11.7% average earlier this year to some 15.3% in the future. Already the solar industry’s lowest cost producer at 73 cents per watt, the company’s thin-film panels will further decline with the planned 30% efficiency boost. Yet, the company’s share prices are still on a steady downtrend, just as the short interest share of float is at a record 34%.

But not all sectors are as hard hit as solar and the leading gainer this month is involved in a form of alternative energy we seldom mention: geothermal. Ormat Technologies, Inc. (ORA) shares jumped 20.29% during the month and they are now up some 35% since their September low. Prized by utilities for base load, power generated from geothermal has one of the highest capacity factors of any energy source, which means that it can produce over 90% of the continuous full power rating. Unlike solar and wind which are intermittent and highly variable, geothermal produces steadily 24 by 7, with very infrequent downtime. Alas, from an investor’s perspective, geothermal stocks have been battered for the last couple of years and this recent rebound represents the first sign for hope that a lasting bottom has been established.

The point of highlighting Ormat is not so much that something special is occurring in geothermal, but just one example of a solid company in a growing market rebounding from extreme oversold levels. What’s not apparent from alternative energy sector indexes and the monthly return figures is that, with the exception of the most volatile stocks in bleeding edge technologies like solar and LEDs, the rest of The Green Portfolio stocks have been rallying strongly across many segments. Our wind market holdings are up 24%, 37% and 45% respectively since their recent lows. The strongest group is energy storage, with all stocks rebounding at least 35% and one of them, our lithium miner, more than doubling since its early October low.

Only time will tell if this broad rebound rise manages to reverse the downtrend.

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The Green Investor Update – September 20, 2011

On September 20, 2011, in Electric Vehicles, Market Trends, Solar, TGI Updates, by Andreas Schreyer
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In this update:

  • Bear market rally?
  • An increasingly large disaster
  • Solyndra syndrome
  • The Green Portfolio update and recommendations

Bear market rally?
Since the intermediate lows set in August, the broad stock market has been attempting to rebound. The bounce in equities has coincided with record low interest rates and newfound strength in the U.S. Dollar. There is little doubt that the Dollar revival is directly caused by a distressed Euro, and this mid-term trend could continue until Europe deals conclusively with the Greek debt issues.

While the stock market has moved off the August lows, the big picture remains unclear. The technology heavy Nasdaq Composite index has been leading with a 13% rebound and is trying to regain footing above its 200-day moving average. Other major indexes like the Dow Jones Industrials and Transportations have gained less than 10% since they triggered their Dow Theory sell signal in August, and they remain bearish. Alas, one of the most bearish sectors of them all has been renewable energy which has lost another 10% since the August lows as measured by the S&P Global Clean Energy Index.

The big question market analysts are debating now is whether the one month old stock market rebound is nothing but a bear trap, a sharp short-lived rally followed by lower lows, or the genuine resumption of an interrupted bull market. With the Nasdaq Composite at key technical levels the question should be answered shortly, one way or the other.

An increasingly large disaster
Of the two solar bankruptcies we mentioned in “Solar Consolidation” in the September issue of The Green Investor newsletter, Evergreen Solar (ESLR) and Solyndra, the latter got significantly more press coverage. Due to the political angle which could be derived from the $535 million loan guarantee the company had received from the U.S. Department of Energy, politicians and the media had a field day and even coined the term “Solyndra-gate” for the occasion.

It was a unique opportunity to attack the current Administration but also to paint the solar industry in the worst possible light. Even venture capitalists who should know better chimed in, with Paypal co-founder and early Facebook investor Peter Thiel even calling clean energy “an increasingly large disaster.” Since our very first research of the solar market we have identified $/watt as one of the primary metrics for the industry. Maybe politicians ignored what the venture capitalists should not have (they invested over $1 billion in the company): that Solyndra was selling its solar modules for half of what they cost to make. Their own projections were to achieve $2/watt in 2013. Industry leaders, including the world’s lowest cost manufacturer of thin-film solar modules, hint: it’s not a Chinese company, are already mass producing solar panels for half of that.

Solyndra syndrome
We have reviewed the collapse in solar company valuations for many months, but with the MAC Global Solar Energy Index reaching a new all-time low today, the solar industry as a whole is priced at “going out of business” levels. On a list of some 250 stock market indexes ranking the one-month performance of various sectors, solar stocks are next to last with a 17% decline. Ranked dead last are Chinese solar stocks which averaged losses of nearly 38% in a month!

We’re not talking about struggling startup companies here; these indexes incorporate most participants, including the leaders of their industries, profitable companies which have generated triple digit sales and earnings growth over the last five years.

Let’s see just how absurd the valuations have gotten. ReneSola Ltd. (SOL) is one of the leading solar silicon and wafer manufacturers in the world with sales of $1.35 billion and net income of $166 million in the last 12 months, and a market cap of less than $230 million. The Price-to-Earnings ratio of 1.41 and the Price-to-Book of 0.36 are laughable, but not nearly as much as the Price-to-Cash per share ratio of 0.52. Yes, a P/C ratio of 0.52 means that you can now buy the company for just about half of the cash they have on hand! The world’s lowest cost manufacturer of crystalline silicon photovoltaic (PV) modules is selling at a P/E of 2.51 and a P/C of 1.05. Trust us, the entire solar industry is not following Solyndra down the drain. We nominate the hedge funds and other speculators who are shorting solar stocks at historic record levels to the Ridiculist.

The Green Portfolio update and recommendations
In the month since our last update, from the close of August 17 to the close of September 16, the S&P 500 has recovered some 1.85% of its earlier losses. Our industry’s benchmark, the S&P Global Clean Energy Index dropped 15.24% during the period, but the hand-picked stocks in The Green Portfolio only declined 2.33%.

With the spotlight continuing to shine on the spectacular solar sector losses, we need to highlight a couple of industries with positive results: smart grid (7.09% gain) and wind energy (6.60% gain.) All of our stock holdings in these two market sectors were in the green over the last month. The wind sector, after being the object of investor scorn for much of the last two years, is showing healthy signs of growth with new deals getting inked and wind farm construction picking up in key markets.

For the second month in a row, the portfolio’s star performer is the world leader in ultracapacitors, which finished the month 14.27% higher after winning a major order from China’s largest bus manufacturer: Zhengzhou Yutong Bus Co., Ltd. Yutong’s newly announced hybrid drive system incorporates 16 ultracapacitor modules to support braking energy recuperation and torque assist functions that enable hybrid transit buses to achieve fuel savings and CO2 emission reduction of approximately 25 percent and reduce particulate missions by up to 90 percent compared with conventional diesel buses. The company’s ultracapacitors are already powering over 4,000 hybrid transit buses worldwide.

 

The Green Investor Update – August 19, 2011

On August 19, 2011, in Market Trends, Precious metals, TGI Updates, by Andreas Schreyer
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In this update:

  • Harbingers of bear markets
  • Safe havens
  • Be greedy only when others are fearful
  • The Green Portfolio update and recommendations

Harbingers of bear markets
Where indicators were mixed last month and markets seemed undecided about the direction to take, few doubts remain as the sharp drops in global stock markets have clearly signaled that they see economic weakness ahead. In addition to several banks downgrading economic growth forecasts and warning of an impending global recession, there are plenty of indicators which now point to a higher probability of a recession and to lower stock market valuations.

One of them, the spread between the yield on high-yield bonds and U.S. Treasuries, has jumped over 40% to 7.3% since the end of July. This indicator rises strongly with recessions because the risk of so-called junk bonds increase in poor economies, dictating higher interest rates for investors, at the same time as rates on government bonds decline. Shrinking Treasury yields have provided reliable warning of stock market weakness lately, and the Fed has promised to keep rates low for the next two years.

Of the many technical indicators analysts look at, none are more widely watched than the ones using moving averages. There are many ways to find trend data and possible trading signals around moving averages, and one of the most feared patterns, the “death cross”, was recently completed by major stock market indexes. A “dark cross” occurs when the 50-day exponential moving average (EMA) crosses below the 200-day EMA, but when that 200-day EMA is trending downward at the time of the crossover, the pattern is called a death cross which is viewed by many as an official bear market signal.

As program trading has come to dominate volume it is no surprise that technical indicators play a big part in market selloffs. While many sell orders got triggered by the indicators, moving averages and their crossings are trailing indicators which highlight what the market has done, not what it will do next.

For us long-term investors, there are also good reasons not to be overly concerned about death crosses. For starters, not every death cross predicts a bear market, as anyone who got whipsawed by them twice in 2010 will testify. Further, an analysis of all the S&P 500 death crosses since 1930 shows that the market index was lower one year after the bearish signal only 5 times out of 19 (i.e. the signal has been wrong 73% of the time.)

Still, within the context of an ongoing secular bear market in stocks since 2000, any signs of cyclical bearishness should be taken as a clue to adjust risk exposure according to your personal preferences.

Safe havens
With investor fear spiking around the world, the exodus from anything perceived as risky is in full swing. With most asset classes declining in value, it seems like the only beneficiaries of the flight to safety are gold and U.S. Treasuries. Gold is increasingly seen as the only currency which cannot be manipulated or printed by governments and it has been setting new price records on a daily basis. It is up over 30% this year, nearly 14% in August alone.

For investors looking for fundamentals-based valuations, the current government bond rally comes as a shock. Shortly after the debt ceiling fiasco, the first ever ratings agency downgrade of the U.S. debt, and record deficits left mostly unchecked, the investor stampede to buy U.S. denominated debt paper does not seem to make much sense. Regardless of logic, that’s exactly what is happening with demand sending Treasury yields to their lowest in sixty years, and bond prices soaring.

Just remember that high volatility plays both ways and that there most likely will be opportunities to get in at lower prices.

Be greedy only when others are fearful
This is as good a time as any to look for advice from the Oracle Of Omaha, Warren Buffett, arguably one of the great investors of all time. He is famous for his long-term value investment strategy and his many quotes teach us how to deal with large market swings. Here are some of his pearls of wisdom:

“Be fearful when others are greedy and be greedy only when others are fearful.”

“The future is never clear, and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values.”

“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”

Judging by the pounding inflicted upon the alternative energy sector over the last few years (the S&P Global Clean Energy Index is down over 76% since its 2008 high, and is losing over 35% since April alone), green investing has to be one of the greatest value investment opportunities of all time!

The Green Portfolio update and recommendations
Since our last update a month ago, the large caps in the S&P 500 lost 9.29% but many other stock categories including tech stocks, small caps, emerging market stocks, and energy stocks fared worse. The Green Portfolio got punished for blending several of these weaker categories and dropped 14.20%. Even our most conservative sector, electric utilities, experienced a 2.33% loss. Still, the portfolio has only lost 17% from its April high, comparable with the S&P 500 drop and about half the decline of the benchmark Clean Energy Index.

This is certainly not a time to gloat about performance but a special mention is due for the only stock in the portfolio to show a gain over one month. The honor goes to the leader in ultracapacitors which announced solid results and should benefit from new fuel efficiency standards which will drive the adoption of so-called stop-start idle elimination technology. The company’s stock gained 7.50% during the month.

 

The Green Investor Update – July 19, 2011

On July 19, 2011, in Market Trends, Solar, TGI Updates, Wind, by Andreas Schreyer
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In this update:

  • Markets remain undecided
  • The stealth clean economy
  • Buying dollars for 62 cents
  • The Green Portfolio update and recommendations

Markets remain undecided

As July began, the stock market was rallying strongly and the Dow Jones Transportation index even established a new all-time high, prompting some to predict an imminent Dow Theory buy signal. Alas, the Dow Jones Industrials which needed to set new highs to confirm a signal started tumbling instead. The Transportation promptly followed suit with a bearish gap reversal.

As economic indicators go, the price of copper has been more reliable in recent years than the Transportation and Industrials indexes used by Dow Theorists. The industrial metal is up over 14% since its May lows which is bullish for the economy.

The European Sovereign debt crisis has accelerated and the specter of a U.S. default has risen as yet another potential blow to the economy. In the absence of a crystal ball we cannot predict the outcome of the debt ceiling debate. We would like to think that cooler heads will prevail in time to steer away from the precipice, but we are not willing to bet on it.

For now, fear has returned to the markets and investors are shunning risky assets once again. Gold is at new record highs.

The energy sector has been rallying with other commodities. Many are watching current crude oil price moves as they represent the first serious attempt to stop declines and establish an intermediate low. Light crude oil prices had fallen over 20% since their highs in early May, but they bounced back some 8% from the June lows.

Judging by the S&P Global Clean Energy Index which dropped over 4% in the last month, the renewable energy sector is not participating in the broad energy rally. With all the doom and gloom about the economy, the national debt and budget deficits added to the gridlock in Washington, energy policy is a very remote concern right now.

The stealth clean economy
A report published last week by the Brookings Institution and Battelle, “Sizing the Clean Economy” revealed some startling figures. The public at large remains mostly skeptical about the amount of green jobs that can be created in the sector of the economy that produces goods and services with an environmental benefit. The conclusions of the report give us much hope for the future. For example:

  • The clean economy employs some 2.7 million workers, already more than the fossil fuel and bioscience industries
  • From 2003-2010, newer clean economy establishments – especially those in young energy-related segments such as wind energy, solar PV, and smart grid-added jobs at a faster rate than the national economy
  • The clean economy is manufacturing and export intensive

Buying dollars for 62 cents
The article “Solar Contrarians” in the July issue of the newsletter presented a review of why we believe the solar sector is oversold and why selected companies are now screaming buys. As the solar sector declined some more since then we feel compelled to highlight one of these opportunities here. One of the two solar companies we added to The Green Portfolio two weeks ago, the Chinese maker of solar wafers, has since issued reduced guidance for second quarter revenue and margins, for which it got punished with lower share prices.

Forgetting about all the noise and bad news, this is a profitable company that’s gaining market share in a fast growing market. And it sells below book value! The company has $4.53/share in cash on hand, more than yesterday’s closing price.

Yes, investing in Chinese solar stocks comes with a non-negligible amount of risk, but if you can stand the heat you will seldom find more favorable risk/reward propositions than right now.

The Green Portfolio update and recommendations
Despite extreme weakness in the renewable energy sector, and a one month decline of 4.05% in the S&P Global Clean Energy Index, The Green Portfolio rewarded us with a gain of 2.18%.

Uncharacteristically, the solar sector was not the laggard this month as that distinction went to the energy efficiency segment which was pulled down by plummeting LED stocks. The LED sub-sector was in fact the worst industry segment of all during the last month, and our portfolio’s worst performer was the leading provider of LED manufacturing equipment which lost 20.55%. Much of the sector’s weakness can be attributed directly to successive quarterly misses, rising inventories and lowered guidance by LED industry poster child Cree, Inc. (CREE) The build out of global LED manufacturing capacity is nowhere near complete and we are sticking with our LED stock through the current weakness.

On the positive side, the strongest segment of our portfolio was wind energy which gained an average 11.42% this month. All of our wind energy stocks had double digit gains with the strongest of them, Woodward, Inc. (WWD), a leading maker of energy control solutions sold to wind turbine makers and other industries. After gaining 12.17% this month the stock is now up 82.17% since we recommended it.

While the solar energy sector continued its slide, it also delivered our best performer which for the second month in a row is our preferred U.S.-based solar manufacturing equipment provider. With this month’ 19.03% advance, the stock is up over 44% in four months.

We are now bracing for a rough earnings reporting period during which it would not be surprising to see companies sold off for the slightest misses or signs of future weakness. As always, the solar sector should be a favorite of short sellers anticipating more bad news.

On the other hand, since the solar sector is so extremely oversold with most of the sector’s risks and liabilities factored in current valuations, any indication of stronger than expected results and outlooks could trigger rallies in selected shares. Just remember that if share prices start moving upward, the shorts will be forced to cover, creating that many more buyers for these stocks.

 

The Green Investor Update – June 17, 2011

On June 17, 2011, in Alternative Energy Stocks, Green Stocks, Market Trends, Solar, TGI Updates, The Green Portfolio, Wind, by Andreas Schreyer
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In this update:

  • Pullback or deeper correction?
  • Markets don’t have to make sense
  • Dirtier than coal
  • The Green Portfolio update and recommendations

Pullback or deeper correction?
The broad stock market had a bad month in May, and so far it looks like June is worse. This week is the first up week in the stock market since April, but a 0.04% gain on the S&P 500 is hardly worth writing home about.

As of last night, June 16, 2011, the S&P 500 index is down 5.24% in the month since our last update (from 5/13/2011 to 6/16/2011) and down 7.04% since its closing high in late April. The Nasdaq Composite index lost 7.24% for the month and is now 9.69% off its late April highs.

A market decline under 10% falls in the pullback category and investors are anxious to find out if it will deepen into a correction or not. There are even downcast analysts out there predicting that this is not a pullback/correction but the beginning of the next bear market. Who knows, maybe their speculation will be correct in the end but we much prefer to listen to the market itself. Despite the weakness, the market is not showing any of the signs usually displayed at major market tops or at the beginning of bear markets. For example, master of market statistics Mark Hulbert recently observed the absence of a volume spike which reliably signaled the start of the last ten bear markets (Read “Is low volume actually bullish?“)

Despite bearish charts, the market is also oversold. Most indexes are now resting near their 200-day moving averages which also coincide with the March lows. Market technicians are now hoping that this support level holds and that markets rally from here.

Markets don’t have to make sense
From a fundamentals point of view, it is hard to see where the fireworks will come from to ignite the markets. With lowered global growth expectations, the Greek default risks looming, QE2 coming to an end and the U.S. deficit limit expected to be reached shortly, the least one can say is that the economic outlook has become more worrisome.

Go explain why the U.S. Dollar has been bouncing strongly since the end of April or why bonds as measured by 30-year US Treasuries are up nearly 8% since their February bottom. The stronger U.S. Dollar combined with the prospect of lower demand, commodities and energy prices have been falling sharply. Copper is down 11%, light crude oil down 16%. But gold remains near its highs.

Dirtier than coal
The oil and gas industry and its supporters are going nuts about natural gas. It is posited as being cleaner than coal, safer than nuclear, cheaper than oil, and because of large untapped gas reserves right here in the U.S. it is increasingly touted as vital to the country’s energy independence. The Marcellus Shale gas reserves deep under the Appalachians are said to be second only to the gigantic gas fields of the Middle East.

As we see the millions poured into massive lobbies and advertising campaigns to paint natural gas green, we must take a stand. While burning natural gas is indeed cleaner than burning coal, it is not renewable or clean or green by any stretch of imagination. It is unlikely that another coal fired plant gets built in this country and the same goes for nuclear over the next few years. If the industry has its ways in expanding usage for electricity generation and as transportation fuel, natural gas will grow over the next decade to become the largest source of greenhouse gases in the United States.

The July issue of the newsletter features a special report on the pros and cons of investing in natural gas.

The Green Portfolio update and recommendations
As long term investors have experienced with every market pullback and correction, most sectors and most stocks are correlated with the broad stock market movements. They tend to move in the same direction but the amplitude of the movements varies greatly. The energy sector is on the volatile end of the spectrum, and the alternative energy segment is no exception.

The Green Portfolio has been giving back some earlier gains by dropping 6.69% in the last month compared with a loss of 8.18% for the S&P Global Clean Energy Index.

Considering how much oil has fallen since its most recent highs (16.00%), a drop matched by our industry benchmark, the S&P Global Clean Energy index, which is down 16.60% since its highs in late March, we are pleased to see that The Green Portfolio is holding up better by giving back “only” 8.51% since the April highs.

The Renewable Chemicals, Fuels and Materials segment of our portfolio was the only one advancing this month thanks to our synthetic biology holding which gained 7.39% during the period. The solar energy sector of the portfolio gave us both the best performer for the month, our preferred maker of solar polysilicon production equipment gaining 11.97%, and the worst, Trina Solar, Ltd. (TSL) which suffered a 22.05% loss. Losses like this are much easier to take when it’s an investment on which we already took partial profit when it doubled and our remaining shares are still up 50.61%.

Trina has been a victim of the emerging market sell-off which placed our Brazilian, Chinese and Indian holdings at the bottom of the pile.

We do not like giving back earlier gains, even if they are but paper gains, but as long term investors we must ride through the weaker periods in order to capture profits from the longer term trends. This does not mean we just have to sit idle and take it. We are actively reviewing our positions and making the necessary adjustments. In case you missed it, the June issue of the newsletter recommended a number of such portfolio adjustments, including taking profits on Zoltek (ZOLT), a maker of carbon fibers used in wind turbine blades, as well as cutting a number of poor performers.

Since inception The Green Portfolio has gained 21.71% while the S&P Global Clean Energy index, is down 32.94% over the same period.

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The Green Investor Update – May 19, 2011

On May 19, 2011, in Alternative Energy Stocks, Commodities, Solar, TGI Updates, by Andreas Schreyer
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In this update:

  • Solar market showing signs of growing up
  • A challenging macro environment
  • Commodities and energy sectors letting off some steam
  • The Green Portfolio update and recommendations

Solar market showing signs of growing up
But solar stock investors are not. The solar photovoltaic (PV) market is well known for its immaturity which has led to brutal boom and bust cycles. Many investors want to dabble in solar stocks to benefit from the tremendous growth rates the industry features, but expect the levels of stability and predictability of established mature markets. The same metrics often do not apply.

Analysts and the media focus on the big news, such as solar subsidy cuts in key European markets, which sends uninformed investors rushing in or out of their positions. As we wrote in the recent post “Sunset in Italy“, “We expect the global market to adapt well to changes in individual markets and for other countries to mostly pick up the Italian slack. For example, after a disastrous 2010, the U.S. is set to double new solar installed capacity this year, without any feed-in tariffs! Asian markets have been booming, with China, India and Japan all expected to have a record year.”

The solar market is not about Italy in 2011 but what will occur globally over the next 5 to 10 years as solar energy becomes cost competitive and mainstream.

The solar market might have evolved into adolescence but we do not expect the growing pains to stop anytime soon as it has many years to go till full maturity. What interests us is that we are entering a steeper growth phase in which manufacturing volumes are moving from niche to mass markets, economies of scale and efficiencies drive costs down, allowing prices of solar energy to move ever closer to grid parity.

The winning companies are managing to profitably grow their global footprint and dramatically expand their manufacturing capacity, all while cutting costs, prices and margins. The number of players will shrink as the losers go bankrupt, and the smaller companies with superior technology get acquired by the ultimate winners.

Our solar stock picks have already contributed more profits to our portfolio than any other sector.

A challenging macro environment
Earnings reporting season is in full swing and, with some 93% of the S&P 500 companies having reported 1Q earnings, nearly 70% beat analyst estimates. The estimated earnings growth rate for the S&P 500 for the second quarter and full year 2011 remains healthy. These statistics are pretty much mirrored in our portfolio companies with the majority beating estimates and reaffirming their 2011 guidance.

The global economic picture remains a major concern though. European sovereign debt issues won’t go away and are causing a shifting regulatory environment. Japan officially entered a second dip recession, now feared for other Western economies.

The U.S. hit the debt ceiling to set up another round of partisan bickering in Washington. Just this week, the political stalemate was demonstrated by the Senate when Republicans defeated a bill seeking to eliminate an estimated $21 billion in tax breaks for big oil companies to help pay off the Federal deficit, only to have Democrats return the favor by rejecting a bill to expand offshore oil and gas drilling in U.S. coastal waters.

Many markets appeared to correct from overextended situations. The U.S. Dollar rebounded strongly after dropping to near record lows. A higher Dollar is never good for the stock market which, after setting new bull market highs at the end of April, pulled back sharply in May. With a 1.37% gain in the last month, the S&P 500 index has been essentially flat.

Commodities and energy sectors letting off some steam
With most commodities priced in U.S. Dollars, the currency’s rebound triggered a sharp sell-off. Sweet crude oil dropped by over 12% since early May while natural gas lost 11%. Silver saw the largest swing with a 26% plunge so far this month.

For the last 30 days, energy stocks were one of the worst sectors.

Still, as we enter the summer season when global oil demand typically increases, most analysts expect energy prices to stop their decline and head back up sooner rather than later.

The Green Portfolio update and recommendations
With softness in the broad stock market and energy shares correcting, our portfolio held up well with a 1.03% decline in the month since our last update against a 4.09% loss for our industry’s benchmark, the S&P Global Clean Energy index.

As nervous investors moved to a risk avoidance mode, it is no surprise that the electric utilities in the portfolio, our conservative safety bastion, are holding-up the best with an average return of 4.91% for the month. Once again, battered wind energy stocks brought up the rear, with an average loss of 7.59%.

On the bright side, the two top performing stocks in the portfolio since our last update through the end of last week were both from the solar sector and they each gained over 17%. One of them, Power-One (PWER), has been featured here in the past, sometimes for its high degree of volatility, but mostly because of its stellar performance. The company has rapidly grown to become the second largest global supplier of power conversion and control electronics for the solar industry, demonstrating how innovation can keep U.S. companies competitive in world markets. Our Power-One investments have already netted us 221% and 314% over the last couple of years and we believe there is a lot more to come.

The second top performer this month, another U.S.-based company and leading provider of manufacturing equipment for the solar PV and LED industries, was only added to the portfolio in early March when it reached our recommended buy point. On top of last month’ 17.23% gain, the shares are up another 8.72% since last Friday on the news of a string of new orders, including their largest ever, $228 million from a large South Korean polysilicon producer. Since the beginning of 2011, the company has announced orders for over $828 million for their polysilicon equipment, sapphire furnaces and silicon ingot production systems which adds to a growing backlog and nicely shores up revenue projections for the next couple of years.

Despite these two high-flyers, the solar holdings in the portfolio returned only 1.90% in the month due to weakness in the shares of PV panel makers which suffered the short-term impact of European subsidy cuts.

Since inception The Green Portfolio has gained 30.37% while the S&P Global Clean Energy index is down 26.98% over the same period.

** Stop guessing. Get immediate access to all Green Portfolio positions and recommendations with a no-risk 30-day trial. You’ll love our green stock picks! **

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Sunset in Italy

On May 10, 2011, in Alternative Energy Stocks, Solar, The Green Portfolio, by Andreas Schreyer
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Sounds romantic, but it’s not. The Italian ministers for environment and industry have signed a much awaited decree which reduces the country’s generous solar incentives. The document is long overdue but came with the surprise of deeper cuts than in previous drafts. More importantly, the decree does not respect investments under way (any installations not complete and connected to the grid by the end of June 2011 are no longer eligible) and continues the uncertainty with a new registry mechanism for big plants which does not guarantee the subsidies.

The kneejerk reaction by analysts and investors is that the actions in Italy will kill the solar market, mostly the same crowd that was trumpeting unrealistically high forecasts for the Italian market not so long ago. We begged to differ then and we beg to differ now.

First of all, nothing is simple in Italian politics. The decree first has to be published in the “Official Gazette” to become law, and could still be vetoed by the President. As you would expect, the Italian solar industry is outraged and investors in the Italian solar power market have already filed law suits against the Italian state to cover damages expected from the regulatory changes. The decree as signed last week is highly unlikely to get implemented in its current version.

A little history will help understand all the hoopla surrounding the Italian solar regulations. As recently as 2008, Italy was not a large solar market and did not rank among the top five. While large European solar markets like Spain and Germany collapsed in 2008, hit by a combination of over capacity, reduced government incentives and the onset of the worst global recession in a century, Italy was busy enacting favorable solar subsidies which triggered a rush to build large power plants. The incentives propelled Italy to become the second largest solar market in a little over two years.

Just in January of this year the Italian Energy Agency (GSE) was crowing about new solar capacity added during 2010 reaching 1.850 MWs (up 62% from 1142 MWs at the end of 2009). There have been some wild forecasts for the Italian solar market in 2011, all the way to some 6,000 MWs, but we tend to side with more conservative estimates, such as Ardour Capital Investments which places Italy at some 11.8% of the world market, or about 2,000 GWs.

Italy appears to be late for the party. Spain, which used to have outrageous incentives and had become the largest solar market in the world, totally mismanaged their incentive plans and killed off the local solar market. France had embarked on incentive plans which rapidly became over-subscribed and had to be curbed. Germany, still the world’s largest solar market (and it’s not because of the abundance of sunshine) appears to be managing their solar incentives reductions the best, gradually and without destroying their industry.

Italy still has the option to follow either scenario, but even if the Italian ministers’ ruling stands the legal, industry and political challenges it faces, it will not affect feed-in tariffs (FITs) for rooftop installations under 1 MW or ground installations smaller than 200 kilowatts. It would certainly reduce the number of large utility-scale installations but in most European markets much of the growth is expected to come from smaller distributed installations.

Another way of looking at what the market is actually doing is through earnings reports from solar companies. Of the major solar panel manufacturers Trina Solar (NYSE: TSL) is the only one so far to revise their outlook downward for the quarter ended in March directly as a result of Italy’s solar regulatory revisions. But they reaffirmed their 2011 view. Another company with an important presence in Italy, First Solar (Nasdaq: FSLR), reported solid results that beat expectations last week and reiterated their 2011 guidance.

As it supplies most solar panel manufacturers with encapsulants, the film that protects the semiconductor material in solar cells and panels, STR Holdings (NYSE: STRI) can be seen as somewhat of a bellwether for the solar industry. Just last week STR reported sales and earnings for the first quarter which exceeded analyst expectations, and the company reaffirmed its full-year 2011 guidance.

In conclusion, the sky is not falling. Yes, ill conceived government subsidies have created a series of bubbles and bust cycles in several countries, but overall, solar energy costs have been falling much faster than subsidies. We expect the global market to adapt well to changes in individual markets and for other countries to mostly pick up the Italian slack. For example, after a disastrous 2010, the U.S. is set to double new solar installed capacity this year, without any feed-in tariffs! Asian markets have been booming, with China, India and Japan all expected to have record year.

We believe that winning solar companies in our Green Portfolio like the ones above have been diversifying geographically to insulate themselves from issues in any one market and will continue to deliver superior revenue and earnings growth

The solar industry, with an average P/E of 11.4 (and an even lower 4.9 for Chinese solar stocks) is near record low valuation levels and offers many bargains we cannot ignore.

** Stop guessing. Get immediate access to all Green Portfolio positions and recommendations with a no-risk 30-day trial. You’ll love our green stock picks! **

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The Green Investor Update – April 19, 2011

On April 19, 2011, in Solar, TGI Updates, Wind, by Andreas Schreyer
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In this update:

  • Japan is not going into meltdown
  • U.S. debt could erupt
  • GE and Google invest in solar
  • The Green Portfolio update and recommendations

Japan is not going into meltdown
Worries about the full impact of the triple Japanese disasters and the popular uprisings in North Africa and the Middle East dissipated as the world and the investment community came to the conclusions that a nuclear meltdown had been avoided, and unrest in Muslim countries would not spread as rapidly as previously thought to more important oil exporters such as Saudi Arabia. After nearly a month-long pullback the stock market rallied strongly through early April. The Federal Reserve fanned the renewed market flames by leaving its monetary policy unchanged and restating its intention to carry out its $600 billion bond purchase program through June, sending several stock indexes past their prerecession highs.

Then the sovereign debt problems in Europe resurfaced, with Portugal requesting more aid, and the U.S. budget stalemate took center stage with government shutdown threats from both sides. While the short-term discussions are over, nothing has been resolved.

U.S. debt could erupt
The deal reached minutes before a shutdown lowered the current year budget deficit by a mere 1%, with both parties claiming a major breakthrough. This year’s deficit is set to become the largest ever and it is pretty clear that the political focus in Washington has shifted from job creation to tackling the national debt.

The largest single-day stock market losses in over a month came just yesterday when the Standard & Poor’s rating agency said there is a 33 percent chance it would lower the U.S. credit rating from AAA in the next two years if Washington fails to pare the country’s debts. The warning also expressed doubts that the government would move quickly to curb the mounting deficits.

GE and Google invest in solar
As Earth Day approaches (recognized around the world on April 22), it is heartwarming to see two giant companies making major bets on renewable energy.

Google joined BrightSource Energy and NRG Solar with a $168 million investment in what is presented as “the world‘s largest solar project under construction which, when completed in 2013, will nearly double the amount of solar thermal electricity produced in the U.S. today.”

GE’s announcement is more significant because of their rapid ascent as a wind energy leader which they now want to replicate in the solar space. The company announced their intent to spend $600 million to build “the largest solar factory in the United States”, which when built, at full capacity will produce 400 megawatts of panels per year. Of added significance is that their stated approach is with thin-film technology which uses cadmium telluride (CdTe), the same technology which has been perfected by First Solar (FSLR). The upcoming May issue includes our analysis of GE’s major move and our solar stock recommendations.

The Green Portfolio update and recommendations
The price of energy (oil) took a breather after a relentless climb while other commodities (gold, silver) are reaching all-time highs. The alternative energy sector has been hit harder, probably because of continued budget worries in developed countries placing government subsidies in doubt. The broad stock market as measured by the S&P 500 advanced 5.00% in the month since our last update while The Green Portfolio lost 1.77%.

Before we review which sectors and stocks dragged down our returns we must mention the strongest performer, one of our preferred energy efficiency pure plays, which advanced 16.91% in the month, helping that sector to lead all other green sectors with a 6.26% gain.

On the downside we had a couple of unhappy surprises from our wind energy stock holdings. Our speculative Chinese wind energy play, China Wind Systems (CWS), hit its 30% trailing stop loss at $3.15 on March 17th, right after our last update went out, and accordingly, we closed the position. The second unwelcome news came from another of our small cap wind holdings which caused us to issue an alert e-mail to current subscribers on April 6, when the shares plunged some 45% after the company warned of lower quarter and fiscal year results. At current levels, we view the company as very undervalued and, for our more aggressive subscribers, we recommend doubling up on your position as we are doing in our model portfolio.

Losses in these two wind companies mean that the wind energy sector is near the bottom with a 6.87% drop. Still, it was the solar sector which managed to lead the way down with a 7.11% drop during the month. Rallying strongly after the Japanese nuclear disaster, solar shares have since been hit by fears of further subsidy cuts in Europe causing a solar market slowdown this year. The culprit once again, is Germany’s SMA Solar, the world’s largest maker of solar inverters, which continues to manage analyst expectations downward with scare tactics, despite keeping their own guidance unchanged.

With all eyes already on Italy, the world’s second largest solar market after Germany, where discussions are currently underway to decide the fate of the country’s subsidies and annual caps, the bearish opinion from SMA caused many investors to head for the exits. Most solar stocks, Chinese manufacturers in particular, have been hard hit with several of them down by over 15% since the beginning of April.

Since inception The Green Portfolio has gained 29.27% while the S&P Global Clean Energy index is down 26.41% over the same period.

We are not making any market predictions, and The Green Portfolio invests with a long-term view, but as we approach the summer months, a statistically weak period for stocks, we would not be surprised by some corrective action or meandering before the bull market resumes. For those of us with large long equity positions we highly recommend reading “Downside Protection: When And How” in the April 2011 issue of the newsletter.

** Stop guessing. Get immediate access to all Green Portfolio positions and recommendations with a no-risk 30-day trial. You’ll love our green stock picks! **

 

The Green Investor Update – March 17, 2011

On March 17, 2011, in Geothermal, Market Trends, TGI Updates, by Andreas Schreyer
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In this update:

  • The genie is out of the bottle
  • Panic investing
  • Volatility returns
  • The Green Portfolio update and recommendations

The genie is out of the bottle
Just as in the old folk tales, the genie escaped from the bottle, and no power on earth can put it back. The metaphor applies to a number of current situations such as the ballooning deficits and debt of Western countries, popular unrest in North Africa and the Middle East, and unleashed nuclear fears. While critical events are catalysts in changing fundamental trends, the changes themselves take years or decades to fully work their course.

Since the triple Japanese disasters started, the events in North Africa and the Middle East have all but been forgotten by the rest of the world, allowing the challenged regimes to do what they do best, crush any opposition with brutal force. The army of Libya’s Gaddafi has been pounding and retaking rebel-held towns and Bahrain’s King is using tanks and troops from neighboring countries, including Saudi Arabia, to subdue their local uprising. Regardless of the short-term outcomes of the unrest across the region, the status quo and balances of power of the last few decades are very likely over.

It is also way too soon to understand the full extent of the Japanese tragedy and its ramifications. The nuclear situation is still evolving rapidly with crews doing everything in their power to regain control, but there is an increasing fear that the potential exists to eclipse Chernobyl as the worst nuclear disaster in history.

It is already clear the current events are highly likely to have some lasting effects such as 1) Oil prices will continue their long-term uptrend and will suffer wild spikes and crashes as geopolitical events threaten supply, and 2) The stealth nuclear renaissance fast tracked by industry lobbyists and politicians will gain scrutiny and lose steam.

Panic investing
Without replaying the newsreel it is plain to see that investors are increasingly following the emotions triggered by world events. The analysis of the real impact such events might have on markets and various investments will come later, unless another crisis pops up before then.

Even industry experts and pundits seem overcome with uncertainty, with contradictory pronouncements and position reversals becoming all too frequent. As always, investors overreact to news events and analyst forecasts.

Japan’s devastating natural disasters, earthquake and tsunami, compounded by the unfolding nuclear crisis have been overpowering the markets. Uranium and many commodity prices plummeted while coal companies rallied. Crude oil prices jumped nearly 25% since trouble started in Libya mid-February, only to crash back below $100 per barrel as world attention shifted to Japan.

Are the risks to crude oil supply lower now? No, but the first knee jerk reaction has been to project that the Japanese tragedies will throw their local economy into a tail spin, which may drag the global recovery with it, and reduce demand for oil. It turns out that one of the first moves by the Japanese government was to secure increased supplies of oil. The massive liquidity injections and rebuilding of infrastructure is also likely to be the largest economic stimulus the country has seen since World War II.

Panic investing has also pushed most world stock markets down as well as most energy sectors. Is this the correction many have been expecting for months or just another minor pullback?

Volatility returns
As uncertainty grows on multiple fronts, so does the investor fear factor which is best represented by the volatility index (VIX). The VIX generally has an inverse relationship to the stock market, with major spikes in the index coinciding with intermediate stock market lows. The VIX had been sliding steadily since June 2010, mirroring the stock market rally and rising investor complacency.

In typical fashion investors reacted to rising uncertainty by dumping nearly all asset classes, with the few exceptions being bonds, precious metals and the Swiss Franc.

One notable change in pattern is that the U.S. Dollar seems to have lost its safe-haven appeal. Uncharacteristically, as investors started fleeing risk trades last month and volatility shot up, the Dollar has continued its slide and is now rapidly approaching its last major support level near the lows it set last November.

The Green Portfolio update and recommendations
As is frequently the case, the baby got thrown out with the bath water, and investors dumped the alternative energy sector with everything else. The Green Portfolio matched the technology heavy Nasdaq Composite by dropping 6.70% in the month since our last update while the large caps in the S&P 500 did marginally better with a 5.36% drop.

In a typical volatility induced reversal, the wind sector, which led last month, brought up the rear this time around with an average drop of 13.74%. Wind was the worst segment but it was not alone as every green industry we track was in the red this month.

The bright star in the portfolio this month was once again LSB Industries (LXU), which we highlighted in January. The leading maker of geothermal and water source heat pumps announced outstanding quarterly results which beat analyst estimates. The shares gained 15.67% in a month, and 137% since we recommended it a year ago. After the company delivered several positive earnings surprises analysts have been raising their future estimates and ratings. These higher projections keep the company valuation at a low forward P/E ratio of 11.38 and we continue our bullish outlook and continue holding our LXU shares.

The only other sector showing signs of life during this market pullback is solar which is rallying over the last week. The timing matches the unfolding of the Japanese nuclear crisis and we suspect that more than a few fund managers came to identify the solar sector as a direct beneficiary and established positions accordingly. For our part we continue to overweigh the solar sector to represent over 20% of our portfolio.

Since inception mid-2009, counting every single recommendation we have issued, The Green Portfolio has gained 31.09%. In contrast, the benchmark S&P Global Clean Energy index is down 26.12% over the same period.

** Stop guessing. Get immediate access to all Green Portfolio positions and recommendations with a no-risk 30-day trial. You’ll love our green stock picks! **

 
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